Social Security is a crucial part of retirement planning for millions of Americans, but many people are confused about how and when to claim their benefits. Some believe the program will disappear when the trust fund runs out, while others rush to claim benefits early out of fear or financial need. However, claiming Social Security too early can result in a permanent reduction in monthly benefits. Experts say that waiting just a little longer can significantly increase the amount of money you receive. This article will explore the biggest myths about Social Security, the impact of early claims, and why delaying your benefits is often the best financial decision.
The Myth of Social Security Running Out
One of the most common fears among Americans, especially older adults, is that Social Security will run out of money. According to Emerson Sprick, an expert at the Bipartisan Policy Centre, the biggest myth about Social Security is that it will disappear once the trust fund is depleted. This simply isn’t true.
While it’s true that the Social Security trust fund may run out of money in the next decade, the program will still receive revenue from payroll taxes. These taxes will continue to fund Social Security, but the benefits may be reduced. Even if the trust fund is depleted, the program will not completely vanish, and some level of benefits will continue. However, these benefits could be lower than what recipients are currently entitled to, depending on how much payroll tax revenue is available.
The Popularity of Claiming Social Security Early
Many people are eager to claim Social Security benefits as soon as they are eligible. According to the Social Security Administration, the most popular age to begin claiming benefits is 62, which is the earliest age you can begin receiving Social Security. In 2022, nearly 29% of beneficiaries claimed benefits at 62.
However, there is a downside to claiming early. Those who claim at 62 may receive up to 30% less than if they wait until their full retirement age (usually between 66 and 67, depending on the person’s birth year). In fact, 62% of beneficiaries claimed Social Security before reaching their full retirement age in 2022, which means they took a significant benefit cut. The longer you wait, the higher your benefits will be.
The Financial Impact of Claiming Early
Claiming Social Security early can have a lasting impact on your monthly benefits. If, for example, you are eligible for a $2,000 per month benefit at your full retirement age of 67, claiming at 62 could reduce that amount to just $1,400 per month. On the other hand, if you wait until age 70, your monthly benefit could increase to $2,480, a substantial increase from the $2,000 you would have received at 67.
Even delaying your claim by just a few months can make a significant difference. Retirement experts recommend waiting as long as possible, up to age 70, to maximise your Social Security benefits. While waiting may not be feasible for everyone, even a delay of six months to a year can have a positive impact on your retirement income.
Reasons People Claim Early
There are several reasons why many people choose to claim Social Security benefits early. The most common reason is fear that the program will run out of money. A 2023 survey by Schroders found that many people believe Social Security will no longer exist by the time they retire. This fear leads them to claim benefits as soon as possible, even if it means receiving a reduced amount.
Another reason people claim early is that they need the money to cover their expenses. Many retirees find themselves struggling financially and may not feel they can afford to wait. In these situations, the temptation to immediately claim benefits may be strong to ensure financial stability.
Additionally, psychological factors play a role. Research from Cornell University and Duke University shows that workers may feel a sense of ownership over the benefits they’ve earned and may be eager to start receiving those benefits as soon as they’re eligible. There is also an aversion to losing money by waiting longer to claim.
The Benefits of Delaying Social Security
Despite the temptation to claim early, experts agree that delaying Social Security benefits is often the best choice. Teresa Ghilarducci, a professor at The New School, explains that claiming benefits early can result in a significant penalty. If you claim at age 62, you may receive 30% less than if you wait until your full retirement age. However, for each year you delay beyond your full retirement age, your benefits increase by 8% per year until you reach age 70.
Experts also point out that delaying benefits not only increases the amount you will receive each month but also helps protect your retirement income against inflation. Social Security benefits are adjusted annually for inflation, which means your benefits will increase over time. These cost-of-living adjustments are an important feature of Social Security, and they are generally better than the adjustments offered by other retirement income sources like annuities or pensions.
The Importance of Making an Informed Decision
Deciding on when to claim Social Security benefits is not always easy. Everyone’s financial situation is different, and there may be factors, such as health problems or a need for income, that make claiming early the best choice. However, it’s important to be informed about the long-term consequences of claiming early.
Delaying Social Security can lead to a much higher income in retirement, and even a small delay can make a difference. While waiting until age 70 may not be realistic for everyone, even waiting a few months can help. Consulting with a financial planner or retirement expert can help you make the best decision for your situation.
Social Security is a valuable program that provides crucial support in retirement, but many people misunderstand how it works and when is the best time to claim benefits. Fears about the program running out of money often lead people to claim benefits early, but doing so can result in a permanent reduction in monthly payments. Experts agree that waiting as long as possible—ideally until age 70—can significantly boost your retirement income and provide greater financial security in the long run. Whether you’re 62 or 65, taking a few extra months or years before claiming benefits can have a major positive impact on your retirement finances.
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